News
Comba announced a profit warning for 1H12 on August 1 after marketclose, guiding for a net loss as: 1) delays in telecom carriers’ capexspending and revenue recognition caused some major product lines’revenue to decline on a yoy basis; 2) overall GM declined on i) selling costhikes due to inflation, ii) competition, and iii) a delay in new productlaunches; and 3) continued investments in R&D and overseas explorationdrove an increase in opex. A 1H12 net loss would imply EPS that is wellbelow our forecast of HK$0.12 and Bloomberg consensus of HK$0.18.
Analysis
Overall, we believe the three factors were already partially expected by themarket and by us, though the magnitude of the impact is worse thanexpected. We think the top-line pressure caused by capex and projectdelays is the key reason for the profit warning. This pressure comes mainlyfrom China Mobile’s (CM) GSM capex decline and TD Phase 5 delays, andChina Unicom’s (CU) slow WCDMA spending, in our view. Although wealready forecast GM to decline yoy, we believe the top-line decline couldput more downside risks to margins. Our estimates already take intoaccount the increase in R&D expenses and for marketing spend to continuethrough 1H12, which we think are the reasons our estimates are belowconsensus.
Implications
As we stated in our June 21, 2012 note, Higher 2013 capex visibility;
Fiberhome onto CL on secular growth, 90% of 1Q12 China telecom capexwas spent on transport network and structural facilities, and this situationseems to have continued into 2Q12. We still expect China wireless capex torecover sometime in 2H12E, which could be supportive of Comba’s topline, due to CM’s commitment in TDS-CDMA and CU’s needs for betternetwork coverage, and wait for clear signs of an industry turnaround. Ourrating, estimates, and target price for Comba are under review.